Disney (DIS) reported slightly better than expected result for its 3Q16 driven by theme parks and the film studio.  There were slight shortfalls vs consensus expectations at media networks and consumer products although there was no further deterioration in affiliate fee trends and subscriber losses at ESPN.  It has been the worries about ESPN that have caused DIS share to lag the market so far this year.

At the same time as the earnings report, DIS announced that it was buying 1/3 of BAMTech, which is the streaming video technology leader owned by Major League Baseball.  DIS will use the technology that already powers many leading OTT services, such as HBONow, to launch its own direct to consumer OTT services for ESPN and the Disney brands.  Additionally, DIS also announced that its main cable networks, including ESPN and ESPN 2, will be included in AT&T’s upcoming nationwide launch of a cable TV like OTT streaming service.  These two announcements were well received by investors as they reveal a good balance for DIS between protecting its traditional cable network business while moving ahead to participate new disruptive TV delivery technologies.

Since last summer when DIS first announced subscriber losses and lower growth at ESPN, the company has been on the defensive regarding new technologies.  Playing offense now should help investor sentiment for DIS shares.  DIS shares trade a discount to the market on P-E basis, a highly unusual occurrence.  Given the quality of the company’s brands and assets and the unique ability to capture broad economic benefits from its intellectual property across all its divisions, DIS is a company that deserves a premium.  Thus, while we are cognizant of the challenges at ESPN – high and rising fixed cost sports rights amid falling subscriber counts – and the difficulty of growing the studio after the incredible success of Star Wars and Pixar and Marvel films, we are sticking with DIS shares.  That said, DIS has been a big winner for Northlake, up about 70% from initial purchases.  Thus, much like we recently did with Activision Blizzard (ATVI, another big winner, we may trim larger positions in DIS to provide buying power for a new idea.  With sentiment improving off the recent quarter and new business announcements, we hope to do so on a catch up move in DIS shares.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.